Pricing Strategies

Once the preceding factors are taken into consideration and a price for an item is established, there are several pricing strategies that can increase sales by making the price more appealing to the customer. The following are the most common.

"One Price" Strategy

The "one-price" strategy charges customers the same price for all varieties of an item.  This is a simple way to set a price that avoids employee error and facilitates the speed of transactions. A consistent, established price makes the customer feel more secure. There are no "surprises" for the customer.

"Multiple Price" Strategy

Under the "multiple-price" strategy, customers are given a discount for purchasing in quantity. This increases returns by boosting the volume sold. For example: 1 for 49 cents or 3 for $1.45 where the cost of the item is 19 cents each. Customers feel they are getting better value by purchasing more. For this to work, margins are computed on the quantity purchased, not the single unit purchase. If the desired margin is set on the single unit package, the returns will be less when the quantity package is sold. Margins should be figured on the quantity package as follows:

Cost of item x # of units in package = Selling Price of the

(1 - desired profit margin)      quantity package

This way a minimum return is guaranteed (as long as the anticipated volume is attained).

Psychological Pricing Strategies

The "psychological-pricing" strategy is one of the most widely accepted methods used in retailing operations. In today's society, consumers are more willing to purchase an item priced with a "9" or "5" as the last digit. The premise is that the consumer thinks they're saving money. For example, using a 60 percent margin on a vegetable that costs 76 cents to produce would require a selling price of $1.90. However, a selling price of $1.89 or $1.99 is standard pricing practice because it appeals to consumers.

Loss Leader Pricing

The "loss-leader" strategy, also known as price leading, involves setting prices of certain items at or below cost. The item is advertised at its low price, which serves to draw customers into the market. This strategy depends on the notion that customers who come to buy the loss leader will purchase other items as well. The increase in store traffic is expected to lead to an increase in overall store sales.

Volume Pricing Strategy

Similar to the psychological-pricing strategy, the "volume-pricing" strategy (also known as "2-For pricing") uses the consumers' perception to its advantage. Rather than selling a single item for 50 cents, two are sold for 99 cents. This is similar to the multiple pricing strategy, with the exception that no significant savings accrue to the customer. This method can help stimulate sales.

Unit Pricing

The "unit-pricing" strategy is used for those items that are sold by weight. Rather than mark each item, the price of the item is attached to a nearby shelf or promotional display. The customers are to weigh the quantities they wish to purchase.

Creative Pricing

The creative freedom of a manager to originate new pricing techniques and strategies is often overlooked. While the above strategies are widely used and proven, they are by no means the only way to price items. Original pricing ideas could help to increase sales and maximize returns. The following examples will help managers begin thinking creatively about pricing.

1.    Re-packaging an item is a good way to stimulate sales and charge higher prices. Repackaging is a form of adding value to the item. For example, items packed in gift baskets bring higher prices than the same items sold in conventional ways. Further, different prices can be charged for different sizes of gift baskets. Some customers are satisfied only with "the best," and may be willing to pay a premium for the large-sized gift basket. Other customers may feel that buying the smaller-sized gift baskets is a better deal; they aren't concerned that the small-sized gift basket is premium-priced.

2.    Differentiating prices on items that are two different quality levels can also increase returns. For example, some customers desire the "better" tomatoes, while others are satisfied with lower-priced tomatoes. Charging a higher price for better quality can increase revenues.

3.    A manager may initiate a "pick-of-the-day" program, where an item is discounted and placed strategically in the market. The pick-of-the-day will possibly increase consumer interest and the discounted price may encourage sales. The concept is that the higher volume will overcome the price discount and generate higher returns.

Summary

Using effective pricing techniques is often overlooked by managers of farm retail markets. Failure to appreciate the role of pricing strategies can limit potential returns. This chapter emphasized how pricing techniques can increase volume and returns. Appropriate pricing techniques also give the impression of greater professionalism. Creative and well conceived pricing will improve the success of the market and increase profits.  

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